First, analyze your business unit’s strategic cost position relative to its competitors’, and identify opportunities for cost reduction. Address the following questions:
- Relative cost position. Do competitors have a cost advantage? Why are we (or they) performing above or below what we would expect, given our relative market position? What is our full potential cost position?
- Experience curve. To what extent is the business unit using its experience curve to drive down unit costs? Where are we versus competitors? What will prices be five years from now?
- Cost-sharing analysis. Is this business separate from another? How well can competitors in related businesses attack our business? Does the benefit of sharing costs with our other business units outweigh any lack of focus that sharing costs across multiple businesses would introduce?
- Best demonstrated practices (BDPs). How low can we take our costs if we employ the best internal and external practices? How low can competitors take costs? (Benchmarking is a related tool in this analysis.)
- Product-line profitability/cost allocation/activity-based costing. Which products and customers really make the money? Which ones should we drop?
Next, turn to customers to identify revenue- and profit-maximizing strategies.
- Market overview and map. What is the market size? Is it growing? How is it broken down by geography, products, and segments? What is each competitor’s market share?
- Customer segmentation. Which parts of the market require different offerings? Are we fully penetrated in some segments and neglecting others? Can we adjust our offerings to grow sales or increase price realization? Which segments are financially attractive for us to invest in?
- Distribution-channel analysis. What range of channels is possible for each product/service? Do some offer superior economics? Are we reaching our full potential in each?
- Customer retention and loyalty. How can we identify the most profitable customers? How many more of them are there yet to reach? How do we increase our retention of our best customers? What is the profit impact of increasing retention by X percent?
- Customer acquisition. How/where can we acquire profitable customers? What will it cost?
Third, investigate opportunities to achieve differentiation and preempt competitor moves.
- Competitive position overview. What is the business unit’s market share/revenue and profit by geography, product, and segment? What are its strengths, weaknesses, opportunities, and threats (SWOT)?
- Profit pool analysis. Are we (or others) getting our fair (or better) share of the industry’s available profits? Where in the value chain is the profit concentrated? Can we move to capture more of it?
- Competitive dynamic. How will competitors act or react to external events? To our strategic actions (such as a merger or acquisition)?
- Relative performance. How do we and each competitor make the profits expected by the relative market share we have? Are we/they underperforming operationally? Is the business correctly defined?
The fourth, and often overlooked, “C” – capabilities – considers strategies that best fit with the business unit’s core competencies.
- Core competencies. What special skills or technologies does the business unit have that create differentiable customer value? How can it leverage its core competencies? What investments in technology and people will help build unique capabilities?
- Make versus buy analysis. What products should the business unit make itself, and what products should it buy from another company?
- Organizational structure. What organizational structure will enable the business unit to implement its strategy most effectively? How can all other aspects of the organization be aligned with the strategy (such as compensation, incentives, promotion, information flow, authority, and autonomy)?